First deadline of the innovation contribution advance payment approaching!

From 2019, only those enterprises are exempt from the obligation to pay innovation contribution, which, taking all provisions of the SME Act into account, qualify as small or micro enterprises also on an aggregate basis considering their partner and linked enterprises. Although with its rate of 0.3 percent, innovation contribution is relatively small compared with almost all other tax and contribution liabilities, it may represent a substantial expense considering its tax base for the businesses specializing in the provision of services.

Taking into account that the base of innovation contribution is identical with the base of local business tax not reduced by tax base decreasing items, the businesses operating with a lower level of material cost, cost of goods sold, intermediated services and subcontractor performance and which are not concerned by research and development either, practically have to fulfil the contribution payment obligation (which otherwise serves a very important purpose) based on their net sales revenue.

The group of entities obliged to pay innovation contribution is extended from 2019!

While in the period of 2005 to 2011 and later from 2015 to 2018, the indicators determining the innovation contribution payment obligation had to be judged based exclusively on the data of the last published financial statements of companies, from 2019, only those enterprises will be exempt from innovation contribution, which taking all provisions of the SME Act into account, qualify as small or micro-enterprises.

An enterprise qualifies as a small enterprise if:

the total number of its employees is less than 50 and

at least one of its annual net sales revenue or its balance sheet total does not exceed the forint-equivalent of 10 million Euros.

In the case of micro-enterprises:

the headcount may not exceed 10,

while at least one of the enterprises net sales revenue or its balance sheet total must not exceed the forint-equivalent of 2 million Euros.

Attention! Partner and linked enterprises shall be considered on an aggregate basis for the purposes of innovation contribution!

These value limits were not changed but we have to point out that the classification is no longer determined independently, considering only the business entity in question but headcount, net sales revenue and balance sheet total data have to be considered on an aggregate basis with the partner and lined enterprises. While in 2018, companies had to calculate with data of the annual report or simplified annual report last known on the first day of the business year (typically that of 2016),from this year, according to the main rule, data of the consolidated annual report or, if this is not available, aggregated data from the financial statements of partner and lined enterprises have to be taken into account for the purpose of these value limits. In order to qualify as a small or micro enterprise, the (referred indicators of) the company must not exceed the above value limits in two consecutive closed reporting periods.

After this brief description of the relevant legal regulation, we can draw the conclusion that all companies will have to re-categorize as of 1 January 2019. Those who may expect to fall out of the group of small and micro enterprises are mostly the companies who have related companies or affiliates as members of a company group. In contrast to the former, simpler calculation methodology, the new rule of aggregate calculation makes the situation more complicated. In the case of a foreign parent company, for example, the indicators of the Hungarian parent company will have to be aggregated with indicators of other members of the company group if the ownership share and voting right criteria defined in the regulation apply to them.

Innovation contribution: four important deadlines annually, first on the 23rd of April.

Time is short as, for those who become obliged to pay innovation contribution from this year, the pro rata temporis part of the innovation contribution liability expected for 2019 will have to be declared and paid for the first quarter until 23 April. The expected amount of the annual innovation contribution liability will have to be estimated again before declaring and paying the contribution advance for the second quarter (due this year until 22 July). We have to take into account that if the expected annual contribution liability changes after the first quarter, the advance for the second quarter will be different from that of the first quarter!

It is interesting that until 31 May (i.e. before the due date of filing the contribution advance for the second quarter) an advance payment tax return will have to be filed for the period from 1 July 2019 to 3 June 2020 in a quarterly breakdown on the basis of the figures of the financial statements of 2018. Calculation obligations do not stop here as companies will have to estimate their innovation contribution payment liability expected on an annual basis again in December as, until 20 December, they will have to file a tax advance payment top-up return and pay any potential difference. Thus, calculations will have to be prepared four times during the year.

Deadline

Period concerned

Task

23 April 2019

Q1 2019

Tax return submission and payment of the innovation contribution liability for the first quarter

31 May 2019

1 July 2019 - 30 June 2020

Annual contribution advance payment tax return filing in a quarterly breakdown based on the figures of the 2018 financial statements

22 July 2019

Q2 2019

Tax return submission and payment of the innovation contribution liability for the second quarter (which may differ from the amount for Q1!)

21 Oct 2019

Q3 2019

Payment of the innovation contribution liability for the third quarter

The correct interpretation of legal regulations and knowledge of their application in practice are both necessary for the preparation of tax calculations and returns. This way, companies can avoid the risks deriving from the errors of aggregate computation with group members (with a view also to accurate tax advance assessment),from an incorrect assessment of taxability and finally but not less importantly from the missing of return filing deadlines. In the case of failure to fulfill obligations or the assessment of lower than the actual liability, a tax shortage can be established during a tax authority’s audit on which tax penalty and late payment fee are also payable. The Hungarian Tax Authority may impose a default penalty on the company in the case of missing the advance payment tax return filing deadline or late fulfilment of the filing obligation.

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József Vizer has spent more than half of his professional career beginning in 2003 as a member of our Tax Practice, initially as tax advisor, then as tax expert, tax manager and tax director. Prior to his appointment as tax manager, József worked for two and a half years at the tax departments of large multinational companies as head of unit and as tax director. Currently, he focuses on the preparation of domestic tax advisory reports, tax calculations and tax returns as well as on the coordination and supervision of tax due diligence procedures, while he also plays an active role in the management of tax advisors and assistant tax advisors. He is a registered qualified tax advisor and a registered chartered accountant.

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